Musings from M.Cubed on the environment, energy and water

Retrospective on restructuring and what it means for our future

Jim Bushnell of UCD and the Energy Institute at Haas has posted about a paper he is coauthoring with Severin Borenstein looking back 20 years at restructuring. It has some interesting insights, but I take issue with a couple points about the original motivation for restructuring, and whether we will be left with legitimate stranded costs with the current transformation.

The rationale behind restructuring (as reflected by my agricultural and industrial clients at that time) of “never again”–the utilities had demonstrated an inability to contain costs in constructing Diablo Canyon, SONGS and Helms, and FERC had gutted the ability for third parties to build turnkey plants in the BRPU decision. The utilities were very slow to adopt the low-cost combined cycle technology, so the only solution looked to be to walk away. Restructuring did establish the merchant industry which has been the leaders in developing renewable technologies and even rooftop solar. Again, we could have expected the utilities to drag their feet, so we have gotten institutional innovation that otherwise would not have happened. (Institutional innovation, not technological, is what got us reduced SOx emissions under the Clean Air Act Amendments of 1990.)

Going forward, leaving the utility system only “strands” network infrastructure if we take the static view that the network will continue in its current state. Shareholders are still recovering their investment, and if they’ve been paying attention since 2007, they should know that overall demand has been falling. They will only be stuck with infrastructure costs if either they have had little foresight or if a sudden technological change accelerates customer exit. In the latter situation, this will only occur if distributed resource costs fall dramatically in which case the exit will probably be socially beneficial. Why should consumers be locked into a large scale network to protect shareholders?

Restructuring was marked by a sudden, dramatic change–opening the market on a single day, divesting generation assets within a few months. The current transformation is more gradual because it is house by house, business by business. Utilities can change their investment plans, and depreciation recovery allows them to recoup their past costs. We may be foregoing the benefits of a paid-up network, but we have almost never regretted such technological change in the past. (Maybe the sale of the “red cars” rail system in LA as the most salient exception.) Do we regret that we’ve left behind land lines for our cell phones? Given the benefits of carrying around microcomputers for daily activities, I think not.